There wouldn't be many who think Guangdong Huate Gas Co., Ltd's (SHSE:688268) price-to-earnings (or "P/E") ratio of 29.7x is worth a mention when the median P/E in China is similar at about 28x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Guangdong Huate Gas could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Guangdong Huate Gas' is when the company's growth is tracking the market closely.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 14%. Even so, admirably EPS has lifted 50% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 29% each year as estimated by the six analysts watching the company. With the market only predicted to deliver 24% per year, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Guangdong Huate Gas is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Guangdong Huate Gas' analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Guangdong Huate Gas that you should be aware of.

You might be able to find a better investment than Guangdong Huate Gas. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.